Is Everyone Wrong About the Dollar? | Macro Mondays

The US dollar reached its highest level against the Japanese yen since 1986, with Andreas identifying dollar strength as the primary drag on his portfolio in June. He attributed the move to a disconnect between falling market-implied inflation and increasingly hawkish Federal Reserve rhetoric, which pushed real rates higher. Kevin Warsh's first FOMC press conference produced dot plots in which the committee raised every single forecast in a more hawkish direction, even as inflation data had been drawing down for nearly two months. The speakers characterized this as generals fighting the last war, referencing the Fed's failure to anticipate the 2021 to 2022 inflation surge. Because no actual rate hikes have occurred, they described the shift from priced-in cuts to priced-in hikes over roughly one month as a forecasting mistake rather than a policy mistake. Warsh also stated the committee should take guidance from markets rather than the reverse, meaning any reversal at his upcoming BIS forum appearance in Portugal would represent the fastest pivot from a pivot on record.

Incoming data is expected to challenge the Fed's hawkish stance. Spanish core inflation for June came in soft, treated as confirmation that disinflation is continuing. Tax indicators showed a deceleration in June, including during the sample week used for the monthly jobs report. The speakers argued that the prior month's strong job creation was partly an artifact of World Cup hiring in leisure and hospitality, a call they said they made when few others did, and that seasonal adjustment for a World Cup effect is practically impossible given the lack of comparable historical data. Most Fed committee members concluded at their recent meeting that the labor market was re-accelerating, but the speakers argued that conclusion was distorted by the World Cup effect. They predicted June job creation will come in below 100,000, below consensus, and that both jobs and inflation will look softer than the Fed's current forecasts over the coming months.

Oil speculator positioning data shows nearly universal short positioning, yet price action in both futures and physical markets has remained benign since the memorandum of understanding was signed. Shipping through the Strait of Hormuz has not returned to pre-war levels, and Andreas said it is unlikely ever to return to pre-war levels. Two effectively separate shipping lanes now exist, one Omani and one Iranian, a distinction that did not appear in official data before the war. Miguel described Iran as attempting to establish control over the Strait to levy transit tolls, with the US escorting ships through the Strait over the most recent weekend. Iran struck back at actions it viewed as humiliating, then talks resumed on Sunday according to an Axios report. Andreas argued that regional stakeholders are already positioning for a post-Strait-of-Hormuz world regardless of the current ceasefire status, and that as long as the Strait does not fully close again, the partial disruption remains manageable based on the precedent of coping without it for an extended period.

A drawdown in the token expenditure index, which measures average price paid per million tokens, was explained by marginal users shifting to cheaper Chinese open-source models rather than an overall slowdown in AI activity. Total volume can grow while the average price falls if cheaper models absorb incremental demand. Rental prices for Blackwell GPUs and memory pricing did not show the same drawdown, and DRAM spot prices accelerated again after the end of Micron's March-to-May quarter. Andreas argued that front-loading of memory demand likely occurred because buyers feared helium gas capacity shortages in the second half of the year related to the Iran war. Apple is reportedly asking the Trump administration for access to Chinese memory manufacturers such as CXMT due to scarcity, but Andreas predicted the administration will say no. Chinese memory competitors are closing the gap with Micron and SK Hynix but are not yet at the same performance level. Memory scarcity is already affecting consumer prices, with iPhone and iPad prices rising, and Andreas said the second half of the year will be shaped by the downstream effects of AI semiconductor demand front-loading across consumer electronics, cars, and the broader supply chain.

Andreas noted that positioning typically reverses into vacation season starting around the third week of July as traders reduce leverage and notional exposure. He predicted the dollar could move lower into that period because long dollar is currently a very popular trade, and that the Japanese yen could see buying for the same reason, describing it as the most popular trade of all. He also flagged that semiconductor and software positions could lose steam and that some shorts in software and metals could see reversals ahead of vacation season.